Wednesday, July 04, 2007

Tax. So why the surprise?

For those interested: an explanation for the Inland Revenue's behaviour, and why I was caught by surprise (previous post).

If you are self-employed (as I am) and you turn out to underpay tax in a previous tax year (as I did in 05/06), then the Inland Revenue charge you tax in the 'current' tax year (06/07). This is "in anticipation" of your underpaying that year as well. It's called a charge 'on account', paid in two instalments: January and July.

If, come December, your business is not doing so well, you can apply to have these on account payments set to zero. I did this end of last year, not because my business was doing poorly, but because my BT contract had me paying PAYE through an 'umbrella company' (don't ask).

However, it turns out that I was still underpaying tax in 06/07 because my umbrella company had an incorrect tax code. Once the Revenue figured this out from my latest tax return in early June 07, they re-invoked the payment on account, backdated to January and with interest. Turns out, in the small print, they are allowed to do this.